Should you order a big MAC, or a special one? What the data says about qualitative versus quantitative material adverse change clauses

From a bidder’s perspective Material Adverse Change (MAC) clauses are an essential deal protection. But should their trigger be qualitative or quantitative? ASIC suggests quantitative, but our analysis of the data shows not everyone agrees with the regulator’s recipe. But let’s face it, dealmaking on public markets is more like the marathon you need to run after the fast food binge.  You need clearance from race officials to join the queue at the starting line, there’s a good chance you’ll be elbowed by interlopers, and in the 42 kilometres of plodding to the line, what could possibly go wrong?

Given a potential to encounter obstacles along the marathon course for a public M&A deal to reach the finishing line, bidders will typically insist on material adverse change (MAC) risk protection.  The MAC risk protection mechanism is typically triggered if an event occurs which significantly and detrimentally impacts the target company. It’s a break-a-leg moment. Or a cold-feet one, if you’re Elon Musk having second thoughts about Twitter.

In negotiating a deal, it can be tempting to take the drive through option. Why jeopardise that bonhomie with the other side through the time-consuming and sometimes difficult hours in the negotiation kitchen to agree upon the right recipe for a MAC? As we’ll discuss, it is well worth investing the time and effort required to craft a home-cooked meal deal. Its key benefit is clarity – a vital ingredient to the race nutrition to sustain parties to the contractual finish line.

 As deals in 2024 continued to be slowed by increasing regulatory intervention, shareholder and stakeholder activism and uncertain economic and global factors (did someone say US election?), our recent experience on public M&A deals has seen parties focus on MAC clauses. It prompted us to don our chef hats and revisit deal recipe books to analyse the data and guidance on MAC clauses. Here are our kitchen tips. 

Qualitative or Quantitative?

First, how is the MAC trigger event defined?  18 months ago after a one-off stoush in the WA Supreme Court,^[1] ASIC publicly stated that MAC triggers should contain objective and quantifiable standards which the bidder, target and target shareholders can understand.   While ASIC’s statement caused some huff and puff speculation about the future of qualitative MACs, it arguably overstated the options available to bidders and targets in framing and negotiating MAC triggers. 

 The data says…

We reviewed 34 scheme implementation agreements negotiated and published since ASIC’s statement. In brief, here’s what we found:

• All of the SIDs had a MAC clause^[2]
• All of the SIDs had a “no MAC” condition precedent (CP)
• 3 of the SIDs had a ‘qualitative only’ MAC clause (with the other 31 having quantitative or quantitative and qualitative elements)
• 13 SIDs had both a quantitative and qualitative MAC clause
• 6 SIDs had a standalone termination right for the occurrence of a MAC
• 10 SIDs included a “no MAC” target warranty

16 SIDs (nearly half of the data set) contained a MAC clause that had a qualitative component.  Often, the qualitative element is a catch-all and might be defined by reference to the target losing its key assets (think a mining company having its tenements expropriated) or being banned from doing business (lest we mention regulators again!).  These schemes were successfully implemented, so it’s puffery to say that qualitative MACs can’t be drafted in an understandable way.  On the other hand, our data set also demonstrated that ‘qualitative only’ MAC clauses are relatively rare.  Parties tend to include a quantitative test in their MAC clause which aids objectivity and certainty.   And, in the event of a dispute, a quantitative element will generally be easier to prove.^[3]

Which measure?

This leads to a second key point - if the parties are negotiating a quantitative limb to a MAC, should it be focused on balance sheet or P&L impact?  The answer is – unsurprisingly – it depends.  Some targets don’t have stable or sizeable earnings and so a P&L measure may not be appropriate.  On the other hand, while balance sheet-based measures work well for diggers, they don’t hold up so well for intangibles.  And the choice here isn’t binary.  In certain cases, listed entities have also agreed to MACs based on cash balances and other bespoke quantitative measures. 

The third and final point is ‘so what?’.  While we lawyers could readily write more than 42 kms of paper on MACs, there is a simple point.  MACs matter because, if they arise, they can end a public M&A deal.  The nuance is how the MAC operates and whether it is an automatic end to a deal or something short of that.  Do you really need to negotiate with race officials if you break your leg?  Our data shows that there isn’t a uniform approach to whether and how MACs feature in condition precedent regimes, termination rights, warranties or other provisions.  However, one point is clear. Whatever your MAC ingredients, it is vital the recipe for its use be straightforward and easy for both parties to follow. In M&A and in the kitchen, uncertainty can spell disaster.